Shareholder Activismin India

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The Advent of Shareholder Activism in India
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DOI: 10.2139/ssrn.2165162
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Journal on Governance, Vol. 1 No. 6, 2012
THE ADVENT OF SHAREHOLDER

ACTIVISM IN INDIA
Umakanth Varottil*
The recent spate of crises afflicting the corporate and

financial sectors around the world has triggered a new
wave of corporate governance reforms, which call for
greater empowerment of institutional and retail
shareholders. The need for such reforms cannot be
greater than in India where controlling shareholders,
or promoters, dominate the corporate landscape.
Consistent with reforms in several countries that seek to

confer greater power in the hands of shareholders, the
recent regulatory developments in India signify a
greater opportunity for shareholder participation in the
form of postal ballot, e-voting and the like. The rapid
proliferation of proxy advisory firms, a hitherto non-
existent phenomenon in India, bestows shareholders
with the advice necessary to exercise their corporate
franchise in an informed manner. The presence of
activist institutional shareholders such as private equity
funds and hedge funds has already caused an upheaval
in some corporate boardrooms in India.
While these developments pave the way for a

transformation in the tenor of the governance debate,
shareholder activism encounters certain structural and
institutional weaknesses embedded in the Indian
markets. The dominance of controlling shareholders in
*
Assistant Professor, Faculty of Law, National University of Singapore. I thank the
students in the Corporate Governance course at the NUJS Summer School held at
IIM-Shillong in June 2012, and the participants at the National Seminar on
“Corporate Laws: Contemporary Issues & Challenges” held at the Gujarat
National Law University, Gandhinagarin October 2012, for thought-provoking
discussions that have helped shape this paper. All errors and omissions are mine.
Email: v.umakanth@nus.edu.sg
583 Journal on Governance [Vol 1:583
most Indian companies operates to dampen the effects

of shareholder activism. The legal system and
institutions in India are not conducive to rendering
timely and cost-effective remedies to shareholders who
adopt a litigation strategy to counter managements that
are perceived to act inimical to shareholder interests.
This paper finds that although shareholder activism is
becoming palpable in the Indian markets, its impact as
a measure of corporate governance enhancement is far
from clear.
2012] The Advent of Shareholder Activism in India 584
CONTENTS
I. Introduction
II. Shareholder Activism: The Concept
A. Collective Action Problems; Shareholder Apathy
B. Defining the Concept
III. Shareholder Passivity as the Starting Point
IV. Regulatory Reforms Towards Greater Shareholder Participation
A. Voting Methods
B. Shareholder Meetings
C. Voting as Responsibility
D. Assessing the Reforms
V. Corporate Governance Intermediaries
A. Proxy Advisors in India: Their Influence
B. Concerns and Possible Mitigating Factors
C. Other Informational Intermediaries
VI. Feasibility of Interactive/Combative Strategies
A. Interactive Strategy
B. Change of Control Strategy
C. Litigation Strategy
VII. Evaluating the Impact of Shareholder Activism
A. Distilling the Evidence
B. Effect on Controlled Companies
VII. Conclusion
I. Introduction
The last two decades have witnessed a significant thrust

towards enhanced corporate governance standards in India. While
some of this may be attributable to the globalization of governance
practices that have had their impact on Indian companies, regulatory
reforms spearheaded by the Securities and Exchange Board of India
(SEBI) have also had a role to play. Since 2000, SEBI has required
public listed companies to deploy well-recognized governance
structures and mechanisms. These include an independent board of
directors, an independent audit process, certification of financial
statements by the chief executive officer and chief financial officer,
and the like. 1These efforts have been embraced by the stock markets
that have conferred a premium towards good governance practices. 2
At the same time, the existing standards are said to be far from
the desirable, and governance crises such as that witnessed in the
Satyam accounting scandal have underscored this line of criticism. 3
Given the influence of controlling shareholders in most Indian
companies, one of the significant shortcomings in the current
dispensation is the lack of shareholder activism, particularly amongst
1
Corporate governance measures are administered through clause 49 of the listing
agreement entered into between listed companies and the stock exchanges.
Although the listing agreement is essentially a contractual arrangement, it has
statutory support as violations of the listing agreement could result in penal
consequences. §23E, Securities Contracts (Regulation) Act, 1956.
2
Bernard S. Black & Vikramaditya S. Khanna, Can Corporate Governance
Reforms Increase Firms’ Market Values? Evidence from India, JOURNAL OF
EMPIRICAL STUDIES, Vol. 4 (2007), available at http://ssrn.com /abstract=914440;
Dhammika Dharmapala & Vikramaditya Khanna, Corporate Governance,
Enforcement, and Firm Value: Evidence from India, (2008) available at
http://ssrn.com/abstract=1105732.
3
Umakanth Varottil, A Cautionary Tale of the Transplant Effect on Indian
Corporate Governance, 21(1) NAT. L. SCH. IND. REV.1 (2009).
institutional and retail investors that hold minority stakes.4 This
perceived weakness in Indian corporate governance appears to be
addressing itself through the onset of activist shareholders in the
Indian corporate sphere, whose efforts have been further buoyed by
regulatory reforms. The phenomenon of shareholder activism, hitherto
absent in India, has made its mark rapidly, and has become a force to
reckon with for Indian listed companies.
Consistent with reforms in several countries that seek to confer

greater power in the hands of shareholders, the recent regulatory
developments in India signify a greater opportunity for shareholder
participation in the form of postal ballot, e-voting and the like. The
rapid proliferation of proxy advisory firms, a hitherto non-existent
phenomenon in India, bestows shareholders with the advice necessary
to exercise their corporate franchise in an informed manner. The
presence of activist institutional shareholders such as private equity
funds and hedge funds has already caused an upheaval in some
corporate boardrooms in India.
While these developments pave the way for a transformation in

the tenor of the governance debate, shareholder activism encounters
certain structural and institutional weaknesses within the Indian
markets. The dominance of controlling shareholders in most Indian
companies operates to dampen the effects of shareholder activism. The
legal system and institutions in India are not conducive to rendering
timely and cost-effective remedies to shareholders who adopt a
litigation strategy to counter managements that are perceived to act
inimical to shareholder interests. This paper finds that although
shareholder activism is becoming palpable in the Indian markets, its
impact as a measure of corporate governance enhancement is far from
clear.
Part II of this paper deals with the theoretical framework of

shareholder participation in corporate democracy, and comments on
4
Id., at 49.
the inefficiencies of the present structure, before going on to define the

concept of shareholder activism and to describe its various types. Part
III looks at the historical position in India where shareholder passivity
was the norm. Part IV examines various regulatory reforms undertaken
in India that enable shareholders to be more participative in corporate
decision-making. These include measures such as e-voting, virtual
shareholders’ meetings, and voting policies for mutual funds. Part IV
explores the roles of corporate governance intermediaries such as
proxy advisory firms and governance analysts and their impact on
shareholder activism. Part V examines the feasibility of combative
strategies by activist shareholders, which include proxy fights, change
of control and litigation against companies, directors and management.
Part VI evaluates the likely impact of shareholder activism in India
after considering the empirical evidence from other countries, and Part
VII concludes.
II. Shareholder Activism: The Concept
Before examining definitions of “shareholder activism”, it

would be useful to identify the problem that the concept seeks to
address.
A. Collective Action Problems; Shareholder Apathy
In large public listed companies, the public (or non-promoter)

shareholders have relatively small stakes and these do not provide
sufficient incentives for them to act together and form coalitions to
meaningfully participate in decision-making of companies. In the
classic Berle & Means corporation where shareholding is diffused, 5
while the shareholders are owners of the company, the managers
controlling the company as shareholders are unable to participate in
5
ADOLF A. BERLE & GARDINER C. MEANS, THE MODERN CORPORATION AND
PRIVATE PROPERTY 47 (1932).
decision-making due to collective action problems.6 Even in controlled
companies, which are predominant in India, 7 collective action
problems prevent minority shareholders from coalescing, which
reduces their effective participation through the exercise of corporate
franchise. In such a case, the lack of minority shareholder participation
augurs to the benefit of the controlling shareholders, and managers
appointed with their concurrence. Related to the collective action
problem is “shareholder apathy”. Since the costs of coordination
among minority shareholders are high, these shareholders either
abstain from voting or merely vote in favor of management (or the
controlling shareholders, as the case may be). 8
Due to collective action problems and shareholder apathy, both

retail and institutional investors have historically been passive
shareholders. The evolution of more active shareholders has been
fairly recent. It is only in the 1980s that even developed economies
such as the United States (US) witnessed the phenomenon of active
investors, which began through institutional investors such as pension
funds and other large institutional investors.9 Unsurprisingly, this field
6
Collective action problems are the difficulties that arise in achieving consensus
among a diffused set of shareholders who do not play an active role in the
company. The heterogeneity of interests and differing levels of information
available with these shareholders exacerbate the problems. See, Stephen M.
Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97
NW. U.L. REV. 547, 557 (2003).
7
Shaun J. Mathew, Hostile Takeovers in India: New Prospects, Challenges, and
Regulatory Opportunities, 2007(3) COLUM. BUS. L. REV. 800; George S. Geis, Can
Independent Blockholding Play Much of a Role in Indian Corporate Governance?,
3 CORP. GOVERNANCE L. REV. 283 (2007).
8
See, Lee Harris, Missing in Activism: Retail Investor Abstinence in Corporate
Elections, 2010 COLUM. BUS. L. REV. 104, 166; Frank H. Easterbrook & Daniel R.
Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395 (1983). See also, Lucian
Bebchuk, The Case for Increasing Shareholder Power, 118 HARV. L. REV. 833,
877 (2005) (Noting some of the reasons why shareholders may have a tendency to
vote in favor of management proposals).
9
Stuart Gillan & Laura T. Starks, The Evolution of Shareholder Activism in the
United States (2007), available at http://ssrn.com/abstract=959670.
has attracted academic research only more recently, 10 as compared to

other areas of corporate governance.
With this background, it would be useful to examine how

shareholder activism may be defined, and also to consider various
types of activism.
B. Defining the Concept
Shareholder activism is considered to be a set of “proactive

efforts [on the part of shareholders] to change firm behavior or
governance rules.”11 It signifies the efforts on the part of investors to
influence the behavior of management in governing the company.
Activist investors are “often viewed as investors who, dissatisfied with
some aspect of a company’s management or operations, try to bring
about change within the company without a change in control.” 12
Activist investors can be contrasted from passive investors, who rarely
participate in corporate decision-making. Passive investors usually
vote with their feet. If they are not satisfied with decisions taken by the
management or controlling shareholders, they simply exit the company
by selling their shares, a practice fancifully referred to as the “Wall
Street walk.”13
10
See e.g., Bernard Black, Shareholder Activism and Corporate Governance in the
United States, in PETER NEWMAN (ED.), THE NEW PALGRAVE DICTIONARY OF
ECONOMICS AND THE LAW (1998), available at http://ssrn.com/abstract=45100;
Stephen M. Bainbridge, Shareholder Activism and Institutional Investors, UCLA
SCHOOL OF LAW, LAW & ECONOMICS RESEARCH PAPER SERIES, available at
http://ssrn.com/abstract=796227; Roberta Romano, Less is More: Making
Institutional Investor Activism a Valuable Mechanism of Corporate Governance,
18 YALE J. ON REG. 174 (2001).
11
Black, supra note 10 at 3.
12
Gillan & Starks, supra note 9, at 5.
13
Jayne Elizabeth Zanglein, From Wall Street Walk to Wall Street Talk: The
Changing Face of Corporate Governance, 11 DEPAUL BUS. L.J. 43 (1998).
However, there could be an argument that the potential for exit by large investors
There are various shades of shareholder activism, although this
paper primarily deals with three. I refer to the first type as
“participative” shareholder activism. In this type, shareholders assume
greater responsibility for participating in shareholder meetings and
exercising their corporate franchise. This way, greater participation by
minority shareholders could have an impact on the outcome of
corporate decisions. Even if the decisions themselves may not be
different because minority shareholders may only have infinitesimal
shareholding in the company, their overwhelming response cannot be
ignored altogether by managements and controlling shareholders.
While shareholders, particularly of the institutional variety, are
demonstrating greater interest in participative activism, legal reforms
in various jurisdictions are utilizing soft law and self-regulatory
mechanisms to encourage greater participation by shareholders in
corporate decision-making. 14
The second type of activism is more upfront. “Interactive”

shareholder activism involves the direct engagement by the
shareholders with the management. Large institutional shareholders
seek to interact with the management and obtain an assessment of the
affairs of the company. Such interaction usually takes place when
either the shareholders are unconvinced of the direction adopted by the
management on certain matters, or when the company undertakes a
major transaction (such as a merger) or suffers a material adverse
effect (such as a significant loss, or other extraordinary event such as a
corporate fraud). Shareholders not only interact to obtain more
might itself have a disciplinary effect on management. As to the efficacy of large

investor exits, see, Anat R. Admati & Paul Pfleiderer, The “Wall Street Walk”
and Shareholder Activism: Exit as a Form of Voice, 22 REV. FIN. STUD. 2245
(2009).
14
See, Financial Reporting Council, The UK Stewardship Code (September 2012),
available at http://www.frc.org.uk/Our-Work/Codes-Standards/Corporate -
governance/UK-Stewardship-Code.aspx. For a survey of trends regarding
activism in various leading jurisdictions around the world, see, Lisa M. Fairfax,
Shareholder Democracy on Trial: International Perspective on the Effectiveness
of Increased Shareholder Power, 3 VA. L. & BUS. REV. 1 (2008).
information from the management, but also to convince the

management of the strategy to be followed and changes to be effected
to enhance value to shareholders. 15 The downside of the interactive
type of activism is that management and controlling shareholders are
under no legal compulsion to engage with shareholders, and can
simply choose to ignore them. In such a case, the interactive efforts
may not be fruitful.
An extended version of such interactive type brings us to the

third category where shareholders adopt a combative strategy. This
involves efforts to overthrow incumbent management through
processes such as proxy fights or hostile takeovers that result in a
change in control of the company. 16 A more aggressive form involves
the initiation of litigation against the company, its board and
management. Certain types of investors, such as pension funds and
hedge funds, have utilized this strategy more recently in certain
jurisdictions like the US to achieve their goals. 17
With this background regarding the rationale for, and types of,
shareholder activism, the paper now turns to the evolution of the
phenomenon in India.
15
This type of activism is becoming prominent with certain types of institutional
investors such as hedge funds. Thomas W. Briggs, Corporate Governance and
the New Hedge Fund Activism: An Empirical Analysis, 32 J. CORP. L. 681
(2007); Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate
Governance and Corporate Control, 155 U. PA. L. REV. 1021 (2007).
16
Briggs, supra note 15 at 681; Brian R. Cheffins & John Armour, The Past,
Present and Future of Shareholder Activism by Hedge Funds, 37 J. CORP. L. 51
(2011).
17
Kahan & Rock, supra note 15, at 1038-39; See also, Randall S. Thomas, The
Evolving Role of Institutional Investors in Corporate Governance and Corporate
Litigation, 61 VAND. L. REV. 299 (2008); Stephen J. Choi & Jill E. Fisch, On
Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension
Funds in Corporate Governance, 61 VAND. L. REV. 315 (2008).
III. Shareholder Passivity as the Starting Point
During the initial years since India’s independence, shareholder

passivity was all-pervasive. The equity markets were considerably
shallow, and retail investment in Indian listed companies was
negligible.18 Although a few leading Indian business houses had listed
companies within their stables, retail investors were unable to make
any dent in the influence of controlling shareholders, who wielded
significant control over their companies due to the substantial
shareholding they commanded. Even if retail shareholders were able to
participate in shareholder meetings and express their views,
managements and controlling shareholders could afford to ignore the
minority voice due to their negligible shareholding in the company and
their consequent inability to affect the outcome of corporate decisions.
The legal regime governing corporate decision-making did not come
to the aid of retail shareholders either. Company meetings had to be
convened at specified physical locations. 19 Several leading companies
had their registered offices in remote locations, which made retail
participation impossible, if not cumbersome. All of these resulted in
passivity among retail shareholders.
On the other hand, certain institutional shareholders such as

banks, development financial institutions (DFIs) and the then largest
mutual fund, the Unit Trust of India (UTI), held larger stakes in
companies in comparison to retail shareholders. 20 It is reasonable to
expect these institutions to exercise their investment oversight more
actively. However, that was not necessarily the case. The banks, DFIs
18
John Armour & Priya Lele, Law, Finance, and Politics: The Case of India, 43
LAW & SOC’Y REV. 491, 496.
19
§166(2), Companies Act, 1956, wherein annual general meetings can be held
only at the registered office of the company or at some other place within the
same city, town or village as the registered office, although there are no
geographical restrictions as far as other shareholders’ meetings are concerned.
20
Jayati Sarkar & Subrata Sarkar, Large Shareholder Activism in Corporate
Governance in Developing Countries: Evidence from India (2000), available at
http://www1.fee.uva.nl/fm/Conference/cifra2000/sarkar.pdf, at 8.
and UTI were heavily subjected to governmental and bureaucratic

control and influence. 21 Although these institutional shareholders often
appointed their nominees to the boards of investee companies and also
exercised their voting rights somewhat regularly, they were never
perceived as independent investors or as a threat to management and
controlling shareholders. The strong nexus that existed between
government and industry ensured that the management always enjoyed
the support of these institutional shareholders. 22 Hence, although the
institutions exercised greater level of participation than retail
shareholders, their influence as activists was minimal at best. These
influences continued to a large extent post-liberalization in 1991, but
the shareholding of such government-controlled banks and institutions
in Indian companies has witnessed a dramatic fall in recent years, 23
due to which their influence has considerably waned.
A related category of institutional shareholders is foreign

portfolio investors. They invest into Indian listed companies through
multiple routes. Prominent among them is the foreign institutional
investor (FII) route, whereby FIIs may acquire and divest shares in
Indian companies through the stock exchange. 24 All administrative
aspects of the investments are handled through domestic custodians
appointed for the purpose.25 Although FIIs hold substantial shares in
21
Omkar Goswami, The Tide Rises, Gradually: Corporate Governance in India
(2000), available at http://www.oecd.org/corporate/corporateaffairs/corporategov
ernanceprinciples/1931364.pdf, at 8.
22
Id.
23
Mathew, supra note 7, at 834.
24
Both SEBI and the Reserve Bank of India (RBI) have created a separate facility
for investment by FII’s into Indian companies. See, e.g., Securities and Exchange
Board of India (Foreign Institutional Investors), Regulations, 1995.
25
§16, Securities and Exchange Board of India (Foreign Institutional Investors),
Regulations, 1995.
Indian companies, they have seldom exercised voting rights in those
companies, barring exceptional circumstances. 26
Another category of foreign investors subscribes to depository

receipts (DRs) in Indian companies instead of acquiring the underlying
shares.27 Interestingly, investors in DRs have not displayed any
keenness at all in the exercise of voting rights on the underlying
shares. As a matter of law, since it is the depository that holds the
underlying shares, only it can exercise voting rights, and the DR
holders do not have any legal right to vote.28 A number of different
models were adopted through market practice to address this. 29 In
some cases, voting rights have been conferred on the depository, to be
exercised according to the instructions of the board of directors of the
company. In such a case, the votes of the DR holders’ shares will be
aggregated with that of the management (and indeed, the controlling
shareholders). In other cases, custodians must exercise voting rights on
the DRs only when that is legally required. Since Indian corporate law
does not obligate shareholders to exercise voting rights, it is not
possible to envisage a situation when voting rights will ever be
exercised on such shares. Only in limited instances are depositories
required to exercise voting rights according to the wishes of the DR
holders. All of these suggest that in case of companies with DRs, the
votes in respect of the DRs are either exercisable in accordance with
26
Reeba Zachariah & Partha Sinha, FII-PEs’ holdings set to change, TIMES OF
INDIA, September 24, 2009; S. Murlidharan, Encourage GDRs, Not FIIs, THE
HINDU BUSINESS LINE, January 18, 2012.
27
In the 1990s and 2000s, several Indian companies approached the international
capital markets to issue global depository receipts (GDRs) and American
depository receipts (ADRs), which are listed on stock exchanges overseas. This
route proved advantageous for Indian companies to attract foreign capital at a
premium to the domestic market.
28
Under various provisions of company legislation, only members registered in the
books of such a company are entitled to receive notices of meetings and to
exercise voting rights. See, e.g., §§ 82, 172, Companies Act, 1956.
29
These are set out in some detail in a background paper issued by SEBI. Securities
and Exchange Board of India, Voting Rights of GDR / ADR Holders, available at
http://www.sebi.gov.in/boardmeetings/132/votingrights.pdf.
the wishes of management, or the DRs have been effectively

disenfranchised. Managements and controlling shareholders therefore
faced virtually no influence from foreign institutional investors, who
either invested directly or through DRs.
Shareholder passivity, both among retail and institutional

shareholders, was the norm following liberalization as well, and
continued to be so until very recently. However, this status quo seems
to have been disturbed more lately in the phase after the Satyam
accounting scandal. Not only have the regulators begun to recognize
the need for greater shareholder participation in Indian listed
companies, but investors themselves (particularly financial
institutions) have sought to monitor their investments more carefully.
The paper now turns to these developments and their impact on
corporate governance in India.
IV. Regulatory Reforms Towards Greater Shareholder

Participation
Over the last decade, regulatory efforts in India have focused

on inducing greater participation in shareholder decision-making. This
has been implemented through a step-by-step approach that addresses
different facets of shareholder participation. These include the manner
of voting, the manner of participating in shareholders meetings, and
whether shareholders might be compelled to cast their votes. Each of
these is addressed below.
A. Voting Methods
In 2001, the facility of voting by postal ballot was introduced.30

This was intended to address the problems faced primarily by retail
shareholders who had to attend and physically participate in
30
§192A, the Companies Act, 1956.
shareholder meetings, often in remote locations of the country. The
system of postal ballot permits shareholders to send in their votes by
post instead of personally attending and voting at a meeting. A set of
rules promulgated by the Central Government listed certain resolutions
that are to be mandatorily put to vote by postal ballot.31 In other cases,
the company has the option to offer the postal ballot facility. 32
While the postal ballot facility represented a sea change in

terms of providing a better option for retail shareholders to cast their
corporate franchise, it failed to make a serious impact. The postal
ballot facility may have removed some of the procedural obstacles to
shareholder voting, but it was not intended to address the broader
issues of collective action problems and shareholder apathy. Moreover,
since shareholders are unable to participate in the discussions, and to
obtain the benefit of the deliberations in the meeting before they cast
their votes, participation levels have been found to be extremely low.
One report states that the response of shareholders through postal
ballot has been abysmally low at only about 3% on average. 33
Given the inadequate functioning of the postal ballot system,

more recent regulatory developments have sought to utilize
technological advancements to enhance shareholder participation and
voting.34 On this occasion, the initiative emanated from SEBI. In July
31
These are matters that materially affect shareholder interest, such as alteration of
the constitutional documents, sale of substantial undertaking of the company,
buyback of shares, issue of shares with differential voting rights, and the like. §4,
Companies (Passing of the Resolution by Postal Ballot) Rules, 2001.
32
Although not mandated by legislation, SEBI exhorted companies to undertake
shareholder voting through postal ballot even in other cases by imposing this as a
condition while granting specific dispensations to companies, such as in
exemptions from making an offer under SEBI’s takeover regulations.
33
Welcome to the World of E-Voting, THE FIRM: CORPORATE LAW IN INDIA, July 2,
2012.
34
The law explicitly recognizes the possibility of shareholder voting through
electronic mode. §192A , Companies Act, 1956. Moreover, the Companies
(Passing of the Resolution by Postal Ballot) Rules, 2001 were superseded by the
2012, SEBI amended the listing agreement requiring large companies

to provide electronic voting (e-voting) facilities in respect of matters
requiring postal ballot.35 According to this new dispensation, the top
500 listed companies on the Bombay Stock Exchange and the National
Stock Exchange are required to provide e-voting facility with effect
from October 1, 2012. Two agencies have already been certified to
provide e-voting platforms.36 Although it is too early to gauge the
effectiveness of e-voting, it is expected to generate greater
participation by shareholders. For example, the e-voting process is less
costly compared to the postal ballot, and involves less time and effort
on the part of the shareholders as well as the company. 37 However, due
to its reliance on technology, the success of e-voting would depend on
the extent of penetration of computers and the Internet across the
country.38
B. Shareholder Meetings
In order to enable the shareholders to exercise their corporate

franchise in an informed manner, it is important that they are able to
participate in meetings, both to make an assessment as to the manner
in which they should exercise their votes, also to speak at the meetings
Companies (Passing of the Resolution by Postal Ballot) Rules, 2011, with effect
from May 30, 2011, which expressly recognize voting by electronic mode.
35
Securities and Exchange Board of India, Amendment to the Equity Listing
Agreement – Platform for E-Voting by Shareholders of Listed Companies,
Circular CIR/CFD/DIL/6/2012 (Jul. 13, 2012).
36
Id. These agencies are the Central Depository Services (India) Limited (CDSL)
and the National Securities Depository Limited (NSDL). Both these agencies
have established e-voting systems, available at http://www.evotingindia.com/
and https://www.evoting.nsdl.com/respectively.
37
Vinod Kothari, E-voting becomes mandatory for all listed companies,
MONEYLIFE, July 16, 2012; Tania Kishore, E-voting will make life easier for
investors, BUSINESS STANDARD, July 4, 2012.
38
It would not be far-fetched to expect persons holding shares in companies to have
access to computers and the Internet.
and convey their views to enable the other shareholders to exercise
their votes in an informed manner as well. Recognizing the limitations
of physical shareholders’ meetings, the Government of India has
introduced the concept of electronic participation. Companies may
now provide the option to shareholders to attend meetings
electronically, through audio-visual means, such that “all persons
participating in that meeting … communicate concurrently with each
other without an intermediary, and … participate effectively in the
meeting.”39 Moreover, companies may provide video conferencing
connectivity during such meetings in at least five locations within
India.40 At the same time, responsibility is placed on the company and
the chairman of the meeting to put in adequate safeguards to ensure the
integrity of the meeting. Although these measures were initially
intended to be mandatory for listed companies in the period
subsequent to the financial year 2011-12, concerns were raised
regarding the legal validity of electronic meetings in the context of the
Companies Act, due to which such electronic meetings are intended to
be optional for listed companies too.41
Since these measures are only optional, and are yet to be fully
effective, they are unlikely to be widely followed. While it is certainly
possible that some of the blue-chip companies will adopt these
voluntary measures, widespread compliance across corporate India
may have to wait.
39
Ministry of Corporate Affairs, Government of India, Green initiative in the
Corporate Governance – Participation by shareholders in general meetings
under the Companies Act, 1956 through electronic mode, General Circular No.
27/2011 (May 20, 2011), ¶ 4(a).
40
Id., at ¶ 6.
41
Ministry of Corporate Affairs, Governance of India, Green Initiatives in
Corporate Governance – Further Clarification regarding participation by
Shareholders or Directors in meetings under the Companies Act, 1956 through
electronic mode – authorization regarding e-voting, General Circular No.
72/2011 (Dec. 27, 2011).
C. Voting as Responsibility
Shareholding in a company is considered to be a bundle of

rights.42 One such right conferred is to participate in corporate
decision-making through the exercise of voting power. In this
jurisprudential backdrop, any kind of obligation or responsibility to
exercise voting rights is antithetical to the rights or entitlement-based
understanding of share ownership. Hence, shareholders cannot
generally be compelled to exercise their voting rights in any manner,
or at all. This legal understanding of share ownership does not
facilitate greater shareholder participation in companies, the
consequence of which is shareholder passivity.
Although shareholders cannot be compelled to exercise their

votes, regulatory authorities have begun to adopt market-based
approaches to address passivity among institutional investors. In a
move that is somewhat unconventional in the Indian context, SEBI has
sought to exhort a specific type of institutional investor, i.e. mutual
funds, to exercise their voting rights in investee companies in a
responsible manner. In 2010, SEBI issued a circular to mutual funds
requiring them to “play an active role in ensuring better corporate
governance of listed companies.”43 Adopting a “comply-or-explain”
approach,44 SEBI requires asset management companies of mutual
42
Cambridge Gas Transportation Corporation v. Official Committee of Unsecured
Creditors of Navigator Holdings plc, [2006] UKPC 26, [2007] 1 AC 508;
Borland's Trustee v. Steel Brothers & Co Ltd,[1901] 1 Ch 279.
43
Securities and Exchange Board of India, Circular for Mutual Funds,
SEBI/IMD/CIR No 18 / 198647/2010 (Mar. 15, 2010) [hereinafter the SEBI
Circular for Mutual Funds].
44
In such an approach, although there is no compulsion to comply with such
requirement, the persons subject to it are required to make appropriate
disclosures on whether they comply with the requirement, or alternatively to
explain the reasons for non-compliance. Anita Indira Anand, An Analysis of
Enabling vs. Mandatory Corporate Governance: Structures Post-Sarbanes
Oxley, 31 DEL. J. CORP. L. 229, 229-30 (2006).
funds to disclose on their websites and in annual reports their general
policies and procedures regarding the exercise of votes on listed
companies.45 Moreover, they are also required to disclose the specific
exercise of voting rights in respect of identified matters such as
corporate governance, changes to capital structure, mergers, takeovers,
and the like. 46
By imposing mandatory disclosure obligations and thereby

enhancing transparency, this compels mutual funds to take a more
active and considered role while exercising their voting rights on
companies. It may no longer be possible for mutual funds to either
abstain from voting or to grant proxies in favor of managements or
controlling shareholders without following a reasoned decision-
making process. This is particularly relevant because institutional
investors such as mutual funds possess significant shareholding (at
least in the aggregate, if not individually) with the power to tip the
scales on key voting matters such as mergers, change of control
transactions, preferential allotments of securities and the like.
While SEBI’s circular technically applies only to mutual funds,

its broader message could well pave the way for greater participation
by other types of institutional shareholders.
D. Assessing the Reforms
The regulatory reforms discussed in this section have been

fragmented in nature, but their common theme has been to increase
shareholder participation in meetings and voting. This would
strengthen the hands of minority shareholders, both of the retail and
institutional varieties, by removing various procedural hurdles that
have impeded their extensive participation in the past. By imposing
stewardship responsibilities on institutional investors such as mutual
funds, SEBI’s goal has become clearer.
45
The SEBI Circular for Mutual Funds, supra note 43 at ¶ 4(ii).
46
Id. at ¶ 4(ii).
At the same time, it would be imprudent to assume that such

regulatory reforms would by themselves instill greater shareholder
participation. More specifically, institutional shareholder activism
must be self-generated, although a trend in India towards such
activism appears to be developing steadily. 47
Despite these regulatory reforms, one significant area of

concern continues to be the lack of adequate information available
with shareholders in order to enable them to exercise their considered
vote. While the Companies Act does contain elaborate provisions as to
the notice to be given to shareholders to convene meetings, both in
terms of the time period and information to be provided, 48 the
disclosure and transparency standards followed in practice continue to
be below par.49 While there has been a gradual increase in the amount
and quality of information disseminated to shareholders to elicit their
franchise, it is arguably inadequate. The lack of availability of quality
information strikes at the heart of shareholder indifference in the
exercise of voting rights. Intermediaries such as proxy advisors and
governance analysts can bridge the informational disparity to some
extent.50 While such intermediaries played a negligible role, if at all, in
Indian corporate governance in the past, they have revolutionized the
governance sphere in the last two years. In the next Part, I consider the
impact of these intermediaries on shareholder activism in India.
47
See, infra, Part IV.
48
§§ 173, 393, Companies Act, 1956.
49
Umakanth Varottil, Corporate Governance in M&A Transactions, Luncheon
Address at the International Bar Association Conference on "The Indian Story in
Global Mergers and Acquisitions", Mumbai (Mar. 9, 2012).
50
Malini Goyal, How and why transparency in boardrooms helps both India Inc &
investors, THE ECONOMIC TIMES, September 30, 2012.
V. Corporate Governance Intermediaries
Globally, governance intermediaries such as proxy advisors

play a significant role in influencing corporate decision-making. Proxy
advisory firms analyze corporate proposals and make
recommendations to their clients, who are primarily institutional
investors, on the manner in which they should exercise their votes.51
The firms also put out public recommendations, which can be utilized
by retail shareholders for whom it is uneconomical to specifically turn
to proxy advisors.52 The proxy advisory industry is rather well
established internationally, and it is actively involved in corporate
governance in jurisdictions such as the US. For example, the industry
leader, Institutional Shareholder Services (ISS) controls about 61% of
the market,53 and is a force to reckon with, as its recommendations are
capable of swinging the votes at shareholders’ meetings and altering
the outcome of the decision taken.
A. Proxy Advisors in India: Their Influence
Since 2010, the proxy advisory industry has blossomed in India

as well. Within a span of two years, three proxy advisory firms have
been established in India,54 and they have already published hundreds
of recommendations regarding corporate proposals pertaining to
various listed companies in India. Their recommendations cover
companies’ proposals relating to the appointment of directors
(especially independent directors), the appointment of auditors, and
51
Paul Rose, On the Role and Regulation of Proxy Advisors, MICHIGAN LAW
REVIEW: FIRST IMPRESSIONS, available at http://www.michiganlawreview.org
/articles/on-the-role-and-regulation-of-proxy-advisors.
52
Id.
53
James R. Copland, Yevgeniy Feyman & Margaret O’Keefe, Proxy Monitor 2012:
A Report on Corporate Governance and Shareholder Activism 22 (Fall 2012),
available at http://www.proxymonitor.org/pdf/pmr_04.pdf.
54
They are (i) InGovern (http://www.ingovern.com/); (ii) Institutional Investor
Advisory Services (IIAS) (http://www.iias.in/); and (iii) Stakeholders
Empowerment Services (SES) (http://www.sesgovernance.com/index.html).
major corporate transactions such as mergers and takeovers. 55 Where

there are governance concerns, the recommendations of proxy advisors
have been against the management proposals. For example, these firms
have recommended against appointment of independent directors who
have served companies for a long period of time, although there is yet
no maximum tenure mandatorily prescribed for independent
directors.56 They have raised similar concerns with respect to auditor
appointments.57 They have also registered opposition in the case of
mergers and corporate restructurings where there is a likelihood value
to the public shareholders might be eroded.58
No longer can managements and controlling shareholders

ignore the influence of minority shareholders (both institutional and
retail). The recommendations of the proxy advisory firms have the
effect of shedding greater light on corporate proposals, and of
galvanizing minority shareholders to overcome collective action
problems and shareholder apathy and to participate more effectively in
corporate decision-making. The fledgling nature of the proxy advisory
industry in India and the absence of systematic empirical evidence
might not yet indicate whether there has been greater exercise of
minority franchise in Indian listed companies, but the fact that the
recommendations are discussed in the public domain in a transparent
manner (such as through the financial press) is expected to operate as a
set of checks and balances against managements and controlling
shareholders from initiating proposals that might not pass muster from
a governance standpoint.
55
Bhuma Srivastava, Proxy advisory firms give a boost to shareholder activism,
THE MINT, June 29, 2012; Naren Karunakaran, Proxy firms wade through
proposed resolutions, THE ECONOMIC TIMES, November 29, 2011.
56
Sucheta Dalal, Proxy advice: Check on misgovernance, MONEYLIFE, August 11,
2011.
57
Id.
58
KARUNAKARAN, supra note 55.
Another positive effect of the proxy advisory industry is its
ability to constantly enhance governance standards. Although listed
companies in India are required to comply with the standards of
corporate governance set out by law, 59 the close monitoring by proxy
advisory firms will motivate companies to elevate their standards of
governance. It is expected that the industry will also help instill global
best standards and practices among Indian companies.
Proxy advisory firms also benefit institutional investors in

other ways. For example, it is no longer necessary for institutional
investors to spend efforts and costs on research, as they can simply
outsource these functions to external firms. 60 The investors and their
managements can train their resources on investment analysis and
decisions, and minimize their focus on governance decisions in their
investee companies. Moreover, managers of institutional shareholders
tend to discharge their responsibilities to their own investors by relying
upon external independent advice on voting and governance matters.61
While the emergence of the proxy advisory industry represents

a whole new chapter in Indian corporate governance as it generates the
much need activism among public shareholders, it is necessary to
caution against some possible concerns that have been witnessed in
other jurisdictions. It is much too early to determine their impact in
India yet, but lessons from experiences in those jurisdictions would
play a role in better moderating the functioning of the industry in India
so as to take full advantage of its benefits by addressing any ill-effects
along the way.
59
While some of the corporate governance standards are mandatory (e.g.
Companies Act, 1956; Clause 49 of the listing agreement), others are voluntary
and to be adhered to on a “comply-or-explain” basis (e.g. Ministry of Corporate
Affairs, Government of India, Corporate Governance Voluntary Guidelines
2009).
60
ROSE, supra note 51.
61
Paul Rose, The Corporate Governance Industry, 32 J. Corp. L. 887, 926 (2007).
B. Concerns and Possible Mitigating Factors

At a conceptual level, there are different lines of concerns
raised regarding the operation of proxy advisory firms. 62 These
concerns have emanated globally in the industry, and are not specific
to India, where the experience with the industry is fairly new. First,
proxy advisory firms may suffer from conflicts of interest, either
actual or potential, that may impinge upon the independence and
impartiality of their recommendations. Proxy advisory firms comprise
both for-profit entities that must raise revenues to carry on their
business, and some non-profit entities. 63 While for-profit entities
mainly charge their customers (being institutional investors) a fee for
the advisory services rendered, some firms also seek other income by
offering consultancy services.64 Often, such services, which are in the
nature of governance consultancies, are provided to listed companies.
This raises conflict concerns, as the independence of recommendations
put out in respect of such companies is not beyond doubt. 65 It is not
known if such conflicts have manifested in the Indian context yet, but
it is useful to take cognizance of international practices that have
emanated.
Second, there are concerns regarding the policies followed by

the proxy advisory firms while conducting their research and issuing
recommendations. One of the criticisms is that the governance
methodologies and metrics developed and utilized are too general and
do not pay sufficient attention to the specificities involved in each
company. 66 For example, there could be a tendency to adopt a “check-
the-box” or “one-size-fits-all” approach, without delving into the
circumstances that operate in each company or with respect to
62
A detailed discussion of these is contained in Rose, supra note 61 at 906-19.
63
Id. at 892.
64
Id. at 898.
65
Id. at 906-07.
66
Id. at 907-08
different proposals. 67 Excessive standardization of recommendations
will have the effect of substantially diluting their value, and
obliterating the contributions that proxy advisory firms can make
towards better corporate governance.
Third, the functioning of proxy advisory firms can be subjected

to more optimal monitoring with a robust legal regime that clearly
delineates the legal responsibility and liability of proxy advisory firms
for the advice they provide. 68 Currently, such a regime does not exist
in India. At most, firms may be responsible contractually for the
advice they provide to institutional investors with whom they have a
contractual relationship. Responsibility for a wider audience in the
form of retail investors for public recommendations is even remote.
The absence of such a regime for responsibility could potentially
threaten the full utilization of the proxy advisory industry as an
effective corporate governance intermediary.
At a broad level, some of the concerns raised may be addressed

either by market forces or by governmental regulation. A market-based
approach would rely on a number of high quality players in the
industry to enhance standards through competitiveness. This would
necessitate the presence of a larger number of players in the industry
as opposed to the current oligopoly situation witnessed in the market,
both in India and globally. 69 The shortcoming of relying purely on a
67
Id. See also, N Sundaresha Subramanian & Raghu Balakrishnan, Small
shareholders on collision course with PEs in Manappuram, BUSINESS
STANDARD, July 27, 2012.
68
European Securities and Markets Authority, Discussion Paper: An Overview of
the Proxy Advisory Industry, Considerations on Possible Policy Options 22,
ESMA 2012/212 (Mar. 22, 2012) [hereinafter the ESMA Paper].
69
In India, as discussed earlier, there are only three players thus far. Even at a
global scale, the industry has been subject to some criticism on account of the
lack of competition. See, e.g., David F. Larcker, Allan L. McCall & Gaizka
Ormazabal, Proxy Advisory Firms and Stock Option Exchanges: The Case of
Institutional Shareholder Services 2-3, STANFORD GSB RESEARCH PAPER NO.
2077 (April 2011), available at https://gsbapps.stanford.edu/researchpapers
/library/RP2077&100.pdf.
market-based approach is evident from other sectors in the corporate

governance field, such as credit rating agencies and large accounting
firms, where a limited number of large players dominate the industry. 70
On the other hand, proxy advisory firms are subject to virtually

no governmental regulation. Since the lack of a legal regime governing
the industry would exacerbate the issues such as conflicts of interest
and the inadequacies in transparency standards, leading economies
around the world are actively considering reform efforts to rein in
proxy advisors. Proposals for regulating the proxy advisory industry
are under active consideration in Europe,71 the United States72 and
Canada.73
In India, proxy advisory firms do not fall within any specific

regulatory oversight mechanism. Given the industry’s nascence, SEBI,
70
Organisation for Economic Co-operation and Development (OECD), Hearings:
Competition and Credit Rating Agencies 6 (2010), available at
http://www.oecd.org/regreform/liberalisationandcompetitioninterventioninregulat
edsectors/46825342.pdf (discussing the oligopolistic situation in the credit rating
industry where the top 3 players command 90% market share); Bernard Ascher,
The Audit Industry: World’s Weakest Oligopoly?, THE AMERICAN ANTITRUST
INSTITUTE WORKING PAPER NO. 08-03 (Aug. 2008), available at
http://ssrn.com/abstract=1337105 (discussing the impact of the oligopolistic
situation with respect to auditors).
71
European Commission, Green Paper: The EU corporate governance framework
(2011), available at http://ec.europa.eu/internal_market/company/docs/modern/
com2011-164_en.pdf; ESMA Paper, supra note 68.
72
Mary L. Schapiro, Remarks to the CorporateCounsel.Net, Say-on-Pay Workshop
Conference (Nov. 2, 2011), available at http://sec.gov/news
/speech/2011/spch110211mls.htm; Joseph E. Bachelder III, Say on Pay: Who is
Watching the Watchmen?, The Harvard Law School Forum on Corporate
Governance and Financial Regulation (Apr. 11, 2012).
73
Canadian Securities Administrators, Potential Regulation of Proxy Advisory
Firms, Consultation Paper 25-401 (Jun. 21, 2012), available at
http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20120621_25-401_proxy-
advisory-firms.htm.
which may have the closest domain relationship with such firms, has
not yet taken any steps to regulate it. At the same time, there have been
calls for SEBI to initiate steps to regulate the industry and lay down
standards of service to be provided by proxy advisory firms. 74 This
would require the establishment of a registration mechanism for such
firms, which would ensure that only those firms with basic
qualifications and competence levels will be permitted to carry on the
business, thereby instituting high entry-barriers. This would help
maintain high quality standards in the industry. Such a registration
mechanism would also help SEBI monitor the actions of the firms, and
also to impose sanctions in the event of non-compliance with services
standards. This would be similar to the regulation of credit rating
agencies, whereby SEBI has been effective in maintaining standards
within the Indian industry, although the industry at the wider global
level had come under some criticism due to its role in the sub-prime
crisis. 75
C. Other Informational Intermediaries
Apart from proxy advisory firms, other types of intermediaries

are beginning to cast their spell on Indian corporate governance. The
year 2012 has witnessed several analysts publishing reports regarding
various Indian leading companies on matters that range from
accounting practices to governance standards to the role of controlling
shareholders.76 By highlighting issues regarding governance of
companies, which extends beyond the traditional confines of financial
analysis, these intermediaries are imposing considerable pressure on
managements and controlling shareholders to re-examine their own
governance standards and practices.77 This will lend itself to greater
74
DALAL, supra note 56.
75
Vandana Gupta, R.K. Mittal & V.K. Bhalla, Role of the credit rating agencies in
the financial market crisis, 2 J. DEV. AGRIC. ECON. 286 (2010).
76
Lijee Philip & Kausik Datta, Analysts go beyond numbers to take on promoters:
will corporates learn to live with criticism?, THE ECONOMIC TIMES, August 21,
2012.
77
James Crabtree, Analysts toughen stance on corporate India, FINANCIAL TIMES,
August 13, 2012.
transparency, as the availability of more information and deeper

analysis will enable investors to take a more informed view of their
investments.
However, this phenomenon is very recent, and its impact on

overall governance standards is yet unknown. In any event, certain
recent reports issued by analysts have been surrounded by their own
share of controversies. Not only have these reports been strongly
refuted by companies and their managements, in one case a criminal
complaint was even filed by the company concerned against the
analyst firm and the individuals who authored the report.78 For these
reasons, a more detailed consideration of the impact of these analyst
firms as informational intermediaries on Indian corporate governance
must await another day.
VI. Feasibility of Interactive/Combative Strategies
After having considered the measures adopted by the regulators

and the industry to enhance shareholder participation, it is now
appropriate to explore the trends and strategies that activist investors
may adopt by directly interacting with their investee companies in
India and, if those result in failure, by undertaking more severe
measures such as bringing about a change in control of the companies
or even litigating against the companies, their directors and
management.
A. Interactive Strategy
Some types of investors, such as private equity funds, venture

capital funds and even hedge funds engage in relationship investing,
which involves a long-term relationship between the investors and the
78
Nishant Vasudevan, Raising governance issues of Indiabulls, RCOM, others
brings Veritas in the spotlight, THE ECONOMIC TIMES, August. 10, 2012.
company. 79 In this arrangement, investors are in close contact with
management and they also tend to provide strategic advice to
management that is beneficial not only to the company but also
indirectly preserves (or even enhances) value to the investors in the
stock they hold. While it is likely that such interactive efforts are being
undertaken in the Indian context too, whereby institutional investors
influence corporate governance in companies, their effect is hard to
measure.80As such interaction takes place in confidence, trends cannot
be discerned due to the absence of publicly available information.
While interactions between investors and companies are useful

in corporate governance, there are some limitations to this approach in
India. First, companies are under no legal obligation to engage with
investors. Their obligations extend to providing information as
required by company law and securities regulation, which is uniform
for all investors. Specific investors are entitled to seek further
information regarding certain matters, such as inspection of the
register and index of members and debenture-holders81 and minutes of
shareholders’ meetings. 82 Other details such as additional financial
information and even minutes of board meetings need not be provided
to individual investors.83Second, companies could find themselves in
violation of the law if they selectively provide sensitive information to
specific investors. Under the SEBI (Prohibition of Insider Trading)
Regulations, 1992, insiders such as directors and managerial personnel
are not permitted to “communicate or counsel or procure directly or
79
Gillan & Starks, supra note 9, at 31; N.K. Chidambaram & Kose John,
Relationship investing: Large shareholder monitoring with managerial
cooperation, NYU WORKING PAPER NO. FIN-98-044 (1998), available at
http://ssrn.com/abstract=1297123.
80
81
§163, Companies Act, 1956.
82
83
Only directors have the right to inspect the books of accounts of a company.
§209(4), Companies Act, 1956. Shareholders do not have a similar right or even
the right to inspect the minutes of meetings of the board of directors. ARVIND
DATAR (ED.), A RAMAIYA: GUIDE TO THE COMPANIES ACT 2158 (17TH ED., 2010).
indirectly any unpublished price sensitive information to any person

…”84 While the regulations on insider trading do not prohibit
discussions with institutional investors, several constraints are imposed
on the conduct of such discussions. Listed companies are required to
maintain and adhere to a code on corporate disclosure practices. 85
Under such a code, listed companies can provide only publicly
available information to institutional investors or analysts. 86 Any
specific information provided to such investors must be
simultaneously made public. 87 The regulations impose other checks
and balances to ensure that discussions with institutional investors do
not provide them with an advantage unavailable to other investors in
the market.88
While interaction between investors and companies is possible,

the significant constraints imposed on that process might limit its
effectiveness as a tool to influence governance in Indian companies.
B. Change of Control Strategy
Where mere interaction with management is found to be

inadequate or ineffective, it is common for activist investors to
advance to the next stage of confronting management with efforts to
displace them. In several jurisdictions, it is not unusual for investors in
such cases to initiate proxy wars and control fights to replace
incumbent managers with new ones who may be amenable to the
views of the activist investors regarding the business and strategy for
84
§3(ii), SEBI (Prohibition of Insider Trading) Regulations, 1992.
85
§12(2), SEBI (Prohibition of Insider Trading) Regulations, 1992.
86
§6.0(i), Schedule II, SEBI (Prohibition of Insider Trading) Regulations, 1992.
87
Id.
88
§6.0, Schedule II, SEBI (Prohibition of Insider Trading) Regulations, 1992. For
example, discussions with investors must be recorded.
the company. 89 Often, activist investors have indeed succeeded in
replacing managements that have resisted their efforts.90
However, in India, it is unlikely that such efforts towards

change in control are likely to succeed. Most public listed companies
in India continue to have controlling shareholders (or promoters),
barring a handful that has diffused shareholding.91 Given that the
controlled company structure is predominant in the Indian corporate
landscape, any attempt by activist investors to seek control of Indian
companies would encounter significant obstacles. 92 The concept of
hostile takeovers, which is the common form of control seeking
mechanism, is almost non-existent in India with only a few such
having been attempted and even fewer having succeeded. 93
For these reasons, it is necessary to remain pessimistic about

the utility of hostile takeovers and proxy fights as weapons in the
arsenal of activist investors in Indian companies. While they may be
effective in other jurisdictions with diffused shareholding, the viability
of such mechanisms in controlled companies that are omnipresent in
India remains doubtful. The situation might likely change in the future
with the growth of retail investment and reduction in controlled
shareholder blocks because listed companies are now required to have
at least a minimum of 25% public shareholding (which is reduced to
10% in the case of government companies). 94
89
Briggs, supra note 15 at 686, 708-09.
90
Id. at 686.
91
Mathew, supra note 7 at 831-39.
92
For a further discussion of controlling shareholders in Indian companies, see,
Varottil, supra note 3 at 18-20.
93
Mathew, supra note 7 at 811-14. See also, Apoorva Paranjpe & Krishna
Shorewala, Institutional investors, corporate governance and global standards:
An Indian perspective, 22(4) I.C.C.L.R. 135, 142 (2011).
94
§19A , Securities Contracts (Regulation) Rules, 1957. Arguably, this rule too is
unlikely to cause a significant dent in the controlling shareholders’ powers as the
ability of controlling shareholders to hold as high as 75% shares is a powerful
one in the backdrop of public shareholders such as institutional and retail
investors whose holdings tend to be fragmented.
C. Litigation Strategy95
Internationally, activist investors have also resorted to litigation

in extreme cases where boards and managements of companies have
acted in a manner that investors believe has caused loss either to the
companies or their shareholders. On occasions, they have even
succeeded. Whether such a litigation strategy would be effective in
achieving the activist investors’ goals of enhancing corporate
governance and shareholder value in Indian companies is a widely
open question. However, as this paper details further, the outlook is
bleak.
Shareholder suits form a useful method of enforcing corporate

law and governance norms through private mechanisms. The
advantage of this method is that the enforcement can be controlled by
an affected shareholder rather than to rely upon public enforcement
that is controlled by the state. Under corporate law, shareholder may
bring principally two types of actions. The first is a derivative action,
whereby a shareholder may sue on behalf of the company in respect of
a loss caused to the company. The classic instance where derivative
action is an effective shareholder remedy is when the directors or
officers of a company have breached their duties to their company, but
the board decides not to initiate legal action against them. 96 In such a
case, the derivative action enables the shareholder to bring a suit on
behalf of the company against the offending party. If the suit is
successful, the company will enjoy the remedies. For instance, any
95
Parts of this section have been derived from the broader discussion on
shareholder derivative actions in India contained in Vikramaditya Khanna &
Umakanth Varottil, The rarity of derivative actions in India: reasons and
consequences, in DAN. W. PUCHNIAK, HARALD BAUM & MICHAEL EWING-
CHOW, THE DERIVATIVE ACTION IN ASIA: A COMPARATIVE AND FUNCTIONAL
APPROACH (2012).
96
It is understandable that the board members may not at all be motivated to initiate
legal action against one of their own.
recoveries under the suit will inure to the benefit of the company rather
than the shareholders. The second type is a direct action. Here, the
shareholder brings a suit against the company, its board, management
or other shareholders for the breach of a duty owed to the shareholder.
In such case, the shareholder can bring a suit for its own benefit and
the remedies would inure to the benefit of the shareholder, who may
enjoy it directly. For instance, any recovery or benefit under a direct
shareholder suit will accrue to the shareholder, and generally not to the
company.
Company law in India provides shareholders with the options

of bringing both a derivative suit and a direct suit if their interests are
adversely affected and a cause of action arises under law. However,
these remedies are arguably not fully effective. The remainder of this
section deals briefly with each of these types of actions and why they
may or may not be viable options to activist shareholders.
1. Derivative Action
The derivative action mechanism has rarely been utilized in

India by shareholders. In another study, Professor Vikramaditya
Khanna and I found that “[o]ver the last sixty years only about ten
derivative actions have reached the high courts or the Supreme Court.
Of these, only three were allowed to be pursued by shareholders, and
others were dismissed on various grounds.”97 The insignificance of
derivative actions becomes crystallized when its rarity is juxtaposed
against the fact that there are over 700,000 active companies in India 98
and nearly 30 million cases pending before various Indian courts.99 A
number of reasons have been proffered for this state of affairs.
97
Khanna & Varottil, supra note 95 at 380.
98
Ministry of Corporate Affairs, Government of India, Annual Report 2011-12
(2012) at 24.
99
Pending litigations – 2010 tally from 3.1 crore to 3.2 crore cases, BAR & BENCH,
February 17, 2011; Jayanth K. Krishnan, Globetrotting Law Firms, 23 GEO. J.
LEGAL ETHICS 57, 70 (2010).
First, the Companies Act, 1956 does not statutorily recognize

derivative actions. One has therefore to rely upon common law to
initiate such an action by establishing that one of the exceptions to the
rule in Foss v. Harbottle100 applies to the given case.101 The
development of common law in this regard has been unclear, making
the use of derivative actions cumbersome. For example, a shareholder
bringing a derivative action must establish “fraud on the minority” 102
and must also come with clean hands. 103
Second, there are procedural difficulties as well. Derivative

actions are considered to be representative actions under Order I, Rule
8, of the Civil Procedure Code, which requires shareholders to obtain
permission of the court before the suit can proceed.
Third, the costs of bringing a derivative action may be

prohibitive, especially if it involves a recovery suit. This is due to the
existence of court fees and stamp duties payable while initiating the
suit, which varies from state to state.104
100
(1843) 2 Har 461. Under this age-old rule, when an injury is caused to the
company, it is only the company that can initiate legal action against the
wrongdoer, and shareholders are barred from doing so.
101
Over the years, the rule has been subjected to several exceptions that permit a
shareholder to initiate a legal action on behalf of the company that has suffered a
breach and loss. For a discussion of these exceptions, see, Khanna & Varottil,
supra note 95 at 381-83.
102
Although not used in the technical sense, “fraud on the minority” requires the
establishment of some kind of unfair discrimination against the minority. See,
ARAD REISBERG, DERIVATIVE ACTIONS AND CORPORATE GOVERNANCE 70
(2007).
103
This is because a derivative action under common law is considered an equitable
remedy that imposes such an onus on the plaintiff shareholder. For an implicit
acceptance of this approach by the Indian courts, see, M. Sreenivasulu Reddy v.
Kishore R. Chhabria, (2002) 109 COMP. CAS. 18 (Bom.); Incable Net (Andhra)
Limited v. Apaksh Broadband Limited, (2008) 142 COMP. CAS. 860 (CLB).
104
For some examples, see, Khanna & Varottil, supra note 95 at 379.
Fourth, countries where shareholder actions have succeeded
possess an active plaintiff bar, whereby plaintiff law firms initiate
actions on behalf of shareholders. Such an active plaintiff bar is non-
existent in India due to the prohibition against lawyers from charging
contingency fees. 105 The absence of a plaintiff bar offers a big blow to
derivative actions because shareholders who incur costs in initiating
suits are unable to enjoy the benefits, which instead flow to the
company. 106
Finally, the institutional environment required for a vibrant

shareholder-friendly legal atmosphere is absent in India. For instance,
litigation could prolong for years, and by the time a remedy is awarded
by the court it may have become redundant due to the lapse of time.
Further, courts in India are unlikely to award significant damages,
which may make shareholder derivative litigation an uneconomical
prospect.
Hence, while there does exist a legal mechanism for activist

shareholders to initiate derivative actions against errant managements,
their effectiveness as a governance tool is circumspect in the Indian
context given the reasons discussed above. 107
2. Direct Action
Unlike derivative actions, certain types of direct actions are

statutorily available. The Companies Act, 1956 enables minority
105
§20, Bar Council of India Rules, Part VI, Chapter II.
106
SEBI has introduced litigation funding with a view to funding shareholder
action by recognized investor groups. SEBI (Investor Protection and Education
Fund) Regulations, 2009; SEBI (Aid for Legal Proceedings) Guidelines, 2009.
However, this mechanism is accompanied by several limitations that have thus
far hindered its effective utilization. Khanna & Varottil, supra note 95 at 394-
95.
107
For a comparison of shareholder derivative litigation in India and China, see,
Ann M. Scarlett, Investors Beware: Assessing Shareholder Derivative Litigation
in India and China, 33 U. PA. J. INT’L L. 172 (2011).
shareholders to initiate actions for oppression108 and

109
mismanagement. These rights by way of personal actions are
available to minority shareholders against the company and the
controlling shareholders. These remedies are quite wide in nature.110
Minority shareholders may bring the action before the Company Law
Board (CLB), which is a specialized body dealing with company law
disputes.111 In actions for oppression and mismanagement, the CLB
has wide-ranging powers to pass various types of orders, including to
regulate the conduct of the company, to order a buyout of the minority
by the majority, and to make any provision that it finds just and
equitable in the circumstances.112
While the oppression and mismanagement remedies appear

attractive to minority shareholders, it is not easy to invoke these
remedies. An action is not admissible unless it carries enormous
support among minority shareholders. 113 While substantial minority
shareholders in unlisted companies may be in a position to invoke
them, it is nearly impossible for minority shareholders in listed
companies (who usually hold less than 10%) to satisfy the threshold
requirement. Moreover, even in terms of numerical aggregation of 100
108
109
110
While the oppression remedy is available in several common law countries, the
mismanagement remedy is unique in India as it has not been borrowed from
English law. DATAR, supra note 83 at 4445.
111
The powers of the CLB will be taken over by the National Company Law
Tribunal, once it is constituted. This will have to await amendments to the
Companies Act, 1956 or the passage of the Companies Bill, 2012, which is
pending before the Rajya Sabha.
112
113
An action for oppression or mismanagement must carry the support of at least
100 shareholders in number or 1/10th of the total number of shareholders,
whichever is less, or such number of shareholders as hold at least 10% of the
total issued shares of the company in value. §399, Companies Act, 1956.
shareholders, the collective action problems discussed earlier 114 will
prevent shareholders from coordinating to support any direct action.
The threshold requirements are therefore prohibitive in nature.115 Even
if these are satisfied, the substantive law imposes onerous
requirements on plaintiff shareholders. For example, for the oppression
remedy, mere isolated instances of abuse may not be adequate, and
there may be a need to demonstrate continuous acts or conduct that
justifies the invocation of the remedy. 116
Therefore, while the remedies of oppression and

mismanagement are quite evolved in India and also confer wide
powers to the CLB to mold a suitable remedy, their practical utility is
largely confined to companies with a limited number of shareholders,
and not for large listed companies with thousands of shareholders
where even the threshold requirements of bringing an action may not
be ordinarily satisfied.
3. The Availability of Alternate Remedies
Litigation by activist shareholders exercising private remedies

may not be admissible if that relates to aspects that are within the
domain of SEBI. Since SEBI is mandated to oversee matters of
corporate governance and securities regulation, any violation of these
norms by listed companies or their boards and managements will
invite the exercise of SEBI’s remedial powers. SEBI may initiate an
investigation into possible breaches either suo moto or upon a
complaint by an aggrieved shareholder. 117 SEBI has progressively
acquired wide powers to make such orders “as may be appropriate in
114
See, supra note 6 and accompanying text.
115
However, the Central Government has the power to authorize shareholders to
initiate an action for oppression or mismanagement even without the support of
the requisite number of shareholders, if it finds just and equitable to do so in the
circumstances. §399(4), Companies Act, 1956.
116
Shanti Prasad Jain v. Kalinga Tubes Ltd, AIR 1965 SC 1535, ¶ 20.
117
§11C, Securities and Exchange Board of India, 1992.
the interests of investors in securities and the securities market.”118

However, SEBI’s mandate is the protection of investors generally, and
not necessarily to remediate the grievances of specific investors who
may have suffered due to actions of companies and their
managements.119 More importantly, in areas where SEBI is
empowered to act, the jurisdiction of civil courts is barred. 120 This
preclusion of civil actions has been interpreted quite widely, 121 which
is likely to be to the detriment of activist investors who may intend to
bring a private action rather than to rely on the regulator. Hence, on
matters relating to areas such as insider trading, corporate governance
and takeovers that fall within SEBI’s domain, India’s legal system
effectively relies upon public enforcement by SEBI and altogether
excludes private enforcement by shareholders, thereby limiting the
remedies they can avail.
4. Exported Litigation
Due to the shortcomings of the Indian legal system in

providing effective remedies to activist shareholders through litigation
strategies, recent high-profile corporate episodes have generated a new
trend that indicates a distinct preference of shareholders to litigate
outside India even though such litigation pertains to the affairs of an
Indian company. Shareholders have either resorted to domestic legal
systems of other countries or even to certain international forums. Two
recent episodes illustrate this phenomenon.
The first relates to the corporate fraud and wrongdoing of

astounding proportions in the erstwhile Satyam Computers, which
118
§11B, Securities and Exchange Board of India, 1992.
119
Khanna & Varottil, supra note 95, at 389.
120
§§15Y, 20A, Securities and Exchange Board of India Act, 1992.
121
Kesha Appliances P. Ltd v. Royal Holdings Services Ltd, (2006) 130 COMP.
CAS. 227 (Bom.).
came into the public domain early 2009. 122 This was followed by
frenetic regulatory action. The Government of India initiated
investigations and criminal charges against the wrongdoers, while at
the same time it also ensured that the company was preserved and then
sold to a suitor, so as to protect the interests of various stakeholders to
the extent possible. 123 While the regulatory response was quite
powerful, there were hardly any private shareholder actions in India,
either by the institutional investors or retail investors. The only
exception was an action by a shareholder association on behalf of
Satyam’s shareholders, which too was dismissed by the court. 124 On
the other hand, both the company as well as the audit firm faced
shareholder suits in the US almost instantaneously as the scandal
unfolded.125 These suits were filed on behalf of holders of American
depository receipts (ADRs) residing in the US. 126 Both the company
and the audit firm settled the suits in the US resulting in payouts of
millions of dollars to US investors.127 Appallingly, the Indian
shareholders of Satyam were unable to recover any compensation
whatsoever, while the US shareholders benefited from the settlement.
This is a glaring example of the disparity in private shareholder
remedies in a developed jurisdiction such as the US and in India.
122
Afra Afsharipour, Corporate Governance Convergence: Lessons from the
Indian Experience, 29 Nw. J. Int'l L. & Bus. 335 (2009); Vikramaditya Khanna,
Corporate Governance in India: Past, Present and Future?, 1 JINDAL GLOBAL
LAW REVIEW 171 (2009).
123
Reactions to the Satyam Sale, INDIAN CORPORATE LAW BLOG, April 15, 2009,
available at http://indiacorplaw.blogspot.com/2009/04/reactions-to-satyam-
sale.html.
124
Press Trust of India, SC dismisses Midas Touch Investor Association plea
against Satyam, BUSINESS STANDARD (Aug. 10, 2009).
125
Shantanu Surpure, Satyam’s Class Action Law Suit, VCCIRCLE, January 19,
2009.
126
Id.
127
Kenan Macado, Satyam Gets U.S. Court OK for Class-Action Settlement, THE
WALL STREET JOURNAL, September 15, 2011; Michael Rapoport, PWC in $25.5
Million Settlement, THE WALL STREET JOURNAL, May 2, 2011.
The second instance relates to the corporate dispute that

unfolded early-2012 between Coal India Limited (CIL), a government
company that is listed on stock exchanges in India, and The Children’s
Investment Fund Management (UK) LLP (TCI), a hedge fund that
holds 1% shares in CIL. The dispute arose because TCI sought that the
Indian government’s intervention in CIL’s affairs must be removed
(although the Government held 90% shares in CIL) and that the board
must manage the company independently. 128 TCI also raised a number
of specific issues regarding the management and governance of CIL.129
Not satisfied with the responses received from CIL, TCI has initiated
action against the company and its directors before the Indian
courts,130 and it has also simultaneously issued a notice initiating
arbitrations under the provisions of the bilateral investment treaties
(BITs) that India has entered into with the UK and Cyprus. 131 This
approach is consistent with the use of the BITs by foreign investors to
initiatelegal action overseas so as to circumvent the Indian courts.132
The foreign investors have also been buoyed by the success obtained
by the foreign party in one of the first BIT actions against the Indian
government.133 While actions under BITs have become a possibility,
these are yet to be fully tested in the Indian context, especially on the
extent to which it can be utilized by portfolio investors such as TCI
that have invested in an Indian company being fully aware of the risks
128
Letter dated Mar. 12, 2012 addressed by The Children’s Investment Fund
Management (UK) LLP to the Board of Directors of Coal India Limited.
129
Id.
130
Shine Jacob & N. Sundaresha Subramanian, TCI sues CIL execs over losses,
BUSINESS STANDARD, October 13, 2012; James Crabtree, TCI turns up the heat
in Coal India dispute, THE FINANCIAL TIMES, Oct. 13, 2012.
131
Vidya Ram & Siddhartha P. Saikia, Coal India issue: Investment fund TCI firm
on action; Ministry sees no need for arbitration, THE HINDU BUSINESS LINE,
May 29, 2012.
132
Anuradha RV & Deepak Raju, BIT of a problem, INDIAN EXPRESS, Jun. 29,
2012.
133
Prabhash Ranjan, The White Industries Arbitration: Implications for India’s
Investment Treaty Programme, INVESTMENT TREATY NEWS, April 13, 2012.
and limitations. 134 In any event, BIT actions are available only when
government action is involved (as in the CIL situation), but cannot be
resorted to in the context of listed companies that are owned by private
parties.
In both the above instances, while efforts to remain outside the

Indian legal system may result in some success (as the Satyam
settlements indicate), they are inherently discriminatory in as much as
they provide benefits to foreign investors only, while domestic
investors are confined to remedies within the Indian legal system,
which suffer from several inadequacies as we have seen.
In concluding this section, we find that the interactive and

combative strategies, while available to activist investors, are not
effective to be able to directly influence the governance practices of
listed companies in India. Recent reform efforts have taken this into
account and sought to arm shareholders with greater access to
remedies. The Companies Bill, 2012 contains a specific provision for
class actions by shareholders against errant companies,135 but this is
arguably too general in nature136 and is accompanied by severe
restrictions that may not significantly alter the status quo.137 Moreover,
the substantive legal provision is only one measure, and does not
address the broader issues of institutional environment in India that
effectively curbs shareholder actions against listed companies.
VII. Evaluating the Impact of Shareholder Activism
After considering the trends regarding shareholder activism

that are emanating from India, and assessing the possibilities and
134
A detailed discussion of the merits of such an action by a portfolio investment
under the jurisprudence pertaining to BITs is beyond the purview of this paper.
135
§245, Companies Bill, 2012.
136
Khanna & Varottil, supra note 95, at 395-96.
137
For instance, actions may be entertained only if they are supported by 100
shareholders or those holding such percentage of shares in the company as the
Government may prescribe by way of rules.
limitations within the Indian context, it is necessary to evaluate the

effectiveness of such activism as a measure of enhancing corporate
governance, both generally as well as in the specific context of India.
A. Distilling the Evidence
The present study finds palpable anecdotal evidence that

indicates a greater role on the part of activist shareholders in India
since 2011 than that witnessed in the past. This is due to the efforts of
the corporate regulators to enhance shareholder participation in
corporate decision-making through various measures such as e-voting,
e-meetings and the imposition of a stewardship role on institutional
investors such as mutual funds. Apart from being nudged by the
regulators, certain activist investors themselves have taken on the
mantle of influencing corporate governance in companies in which
they have invested. The emergence of a strong set of informational
intermediaries in the form of proxy advisories signals a new era in
shareholder activism in India. Although it is too early to determine the
impact of these measures on Indian corporate governance, it is
reasonable to expect the momentum towards shareholder activism and
(away from passivity) to continue in the near future.
While some general trends in India can be gleaned from

anecdotal evidence, there is little track record to build any empirical
evidence yet. Although there are empirical studies carried out in other
markets, they remain equivocal about the positive impact of
shareholder activism on corporate governance.138 A number of reasons
have been offered, that range from the methodological to the
substantive. At the outset, there are difficulties in measuring the
effectiveness of shareholder activism. 139 For instance, there is often no
138
For a discussion of several empirical studies, see, Gillan & Starks, supra note 9;
Black, supra note 10.
139
Gillan & Starks, supra note 9, at 16-17.
public evidence of the interactive efforts of shareholders to influence
corporate governance in investee companies. Moreover, there are
difficulties in establishing the causal link between activism and better
corporate governance.140 Even when measurable, the results have not
been convincing, as the impact appears to be quite feeble. 141 As Gillan
and Starks note:
The evidence provided by empirical studies of the

effects of shareholder activism is mixed. While some
studies have found positive short-term market reactions
to announcements of certain kinds of activism, there is
little evidence of improvement in the long-term
operating or stock-market performance of the targeted
companies.142
On the other hand, it has been argued that the significant costs
generated by shareholder activism cannot justify the limited benefits it
confers. 143
Concerns have also been expressed about the possible negative

impact of some forms of activism, such as the type pursued by hedge
funds. 144 The natural assumption is that any value created by activist
shareholders is equally enjoyable by the other passive investors, which
arises due to the overall enhancement of governance standards in the
company. 145 But, that assumption is not necessarily valid in all
circumstances. Activist investors may likely “pursue agendas not
140
Id. at 17.
141
Black, supra note 10, at 15.
142
143
Bainbridge, supra note 10 at 13-14; Romano, supra note 10.
144
Gillan & Starks, supra note 9, at 34. See also, Henry T.C. Hu & Bernard Black,
The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S.
CAL. L. REV. 811 (2006).
145
Briggs, supra note 15, at 722 (although empirical evidence to support this
continues to be mixed).
shared by and often in conflict with those of passive investors.”146

Moreover, institutional investors are subject to inherent conflicts of
interest. Although they may hold shares for the benefit of their own
investors (such as unit-holders in a mutual fund), it is the managers
who exercise voting rights in the investee companies. There is a risk
that the activist approach may be beneficial to the managers, but not
necessarily in the interests of the ultimate investors or unit-holders in
the institution. While there is yet no evidence of such a distinct
conflict that has emanated in India, the importance of its adverse effect
on shareholder activism cannot be ignored. 147
While the anecdotal evidence indicates the strong emergence of

shareholder activism in India, the empirical evidence regarding its
impact on corporate governance in other markets is mixed. Given this
situation, the benefits of shareholder activism as a measure to boost
corporate governance in India must be accepted with some caution.
B. Effect on Controlled Companies
While evaluating the impact of shareholder activism, regard

must be had to the ownership structure of companies. Activism may
have a different effect on companies with controlling shareholders as
opposed to those without. For example, in companies without
controlling shareholders, the influence of activist shareholders and
increased voting by shareholders may have a direct bearing on the
146
Bainbridge, supra note 10, at 1; Iman Anabtawi & Lynn Stout, Fiduciary Duties
for Activist Shareholders, 60 STAN. L. REV. 1255 (2008) (arguing that activist
shareholders are susceptible to greed and self-interest, which must be
counterbalanced by foisting fiduciary duties upon them). See also, Iman
Anabtawi, Some Skepticism About Increasing Shareholder Power, 53 UCLA L.
REV. 561 (2006).
147
For an extensive discussion of the conflict issue in China, see Chao Xi,
Institutional Shareholder Activism in China: Law and Practice (Part 1), [2006]
I.C.C.L.R. 251, 258-62.
outcome of proposals made by management.148 On the other hand,
where controlling shareholders are dominant, it is unlikely that efforts
on the part of the regulators to promote shareholder voting or activist
stances adopted by certain institutional shareholders will have the
same effect as in companies with diffused shareholding. As Bebchuk
and Hamdani note:
In [companies with controlling shareholders] …, the

rules governing voting procedures are likely to be
inconsequential. Controllers-unaffected by the
collective action and free-rider problems that
discourage action by dispersed shareholders-will
exercise their voting power even without rules to
facilitate shareholder voting. Furthermore, as long as a
controller has enough votes to determine voting
outcomes, even rules that facilitate voting by minority
shareholders will not enable them to pass resolutions
not favored by the controller.149
In insider economies such as India, due to the influence of

controlling shareholders, activist investors would not find it easy to
alter the outcome of decisions made at shareholders’ meetings. This
may in turn reduce the incentives of activist investors to adopt stances
that operate to act as a check on management. As a corollary,
controlling shareholders are less likely to be deterred by the actions of
activist shareholders.
In a study that is specific to India, Geis has conceptually and

empirically demonstrated that while independent blockholding by
148
However, even in such cases, the evidence is unconvincing. For example, a
recent report indicates that shareholders do not necessarily vote along with
recommendations made by proxy advisory firms. James R. Copland, Politicized
Proxy Advisers vs. Individual Investors, THE WALL STREET JOURNAL, October
8, 2012.
149
Lucian A. Bebchuk & Assaf Hamdani, The Elusive Quest for Global
Governance Standards, 157 U. Pa. L. Rev. 1263, 1291 (2009).
institutional investors is generally useful in theory, it is unlikely to

have any impact on corporate governance in India due to the current
ownership structure of Indian companies with concentrated
shareholding. 150
Hence, if there is some ambivalence regarding the

effectiveness of shareholder activism generally, then its positive effect
on controlled companies that populate the Indian corporate setting is
only likely to be minimal.
In concluding this section, we find that while shareholder

activism does influence corporate governance in several ways, not the
least by publicizing governance failures and drawing attention to
specific issues that may be of relevance to the investing community,
we are far from finding any empirical correlation between shareholder
activism and corporate governance. If that link is not clear in
developed markets such as the US with companies that have diffused
shareholding, we must accept shareholder activism in insider
economies like India that have controlled companies with some
amount of caution. While it would be rash to argue against activism,
its impact must not be overstated.
VII. Conclusion
This paper traces the evolution of shareholder activism in

India. Hitherto non-existent, the phenomenon has been ushered into
Indian corporate governance within a span of the last two years. It has
been facilitated through regulatory reforms that enable greater
participation of shareholders in corporate decision-making. More than
that, a market environment for activist investors and corporate
governance intermediaries has rapidly taken shape in India. The
proliferation of proxy advisory firms issuing recommendations in
150
Geis, supra note 7.
respect of hundreds of Indian listed companies, and high-profile
examples of institutional investors such as hedge funds confronting
Indian managements is emblematic of the trend.
However, the corporate structure and legal system in India

offer considerable resistance that prevents full utilization of the
benefits of shareholder activism. The existence of controlling
shareholders in most Indian companies cushions the impact of activist
investors. The legal system is not conducive to shareholder litigation,
which is a tool utilized by activist investors in other jurisdictions, often
successfully. At an overall level, there is also some pessimism about
the impact of shareholder activism on the long-term performance of
companies and shareholder value.
In building upon the present study, future efforts may be

undertaken on two fronts. First, there is a need for greater empirical
research on the impact of shareholder activism in India, which would
help better understand its desirability and effect in the Indian context.
Second, more efforts must be taken to enhance the power of minority
shareholders who are compelled to act in the shadow of controlling
shareholders. These include measures such as cumulative voting for
appointment of independent directors,151 prohibition on controller
shareholder voting in case of interested party transactions, 152 and the
like.153 If such an enabling regime were created, it would provide the
necessary incentives to activist shareholders to bring about overall
enhancement of corporate governance norms in the listed companies in
which they have invested, and also generally raise governance
standards within the country.
151
Umakanth Varottil, Evolution and Effectiveness of Independent Directors in
Indian Corporate Governance, 6 HASTINGS BUS. L.J. 281, 357-60 (2010).
152
Varottil, supra note 3, at 49. SEBI Press Release, “Recommendation to MCA on
related party transactions” (Feb. 7, 2011).
153
A detailed menu of recommendations to enhance institutional shareholder
participation is contained in Paranjpe & Shorewala, supra note 93 at 146-47.
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The Advent of Shareholder Activism in India

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THE ADVENT OF SHAREHOLDER

The recent spate of crises afflicting the corporate and

Consistent with reforms in several countries that seek to

While these developments pave the way for a

most Indian companies operates to dampen the effects

The last two decades have witnessed a significant thrust

Consistent with reforms in several countries that seek to confer

While these developments pave the way for a transformation in

Part II of this paper deals with the theoretical framework of

the inefficiencies of the present structure, before going on to define the

II. Shareholder Activism: The Concept

Before examining definitions of “shareholder activism”, it

A. Collective Action Problems; Shareholder Apathy

In large public listed companies, the public (or non-promoter)

Due to collective action problems and shareholder apathy, both

has attracted academic research only more recently, 10 as compared to

With this background, it would be useful to examine how

B. Defining the Concept

Shareholder activism is considered to be a set of “proactive

The second type of activism is more upfront. “Interactive”

might itself have a disciplinary effect on management. As to the efficacy of large

information from the management, but also to convince the

An extended version of such interactive type brings us to the

III. Shareholder Passivity as the Starting Point

During the initial years since India’s independence, shareholder

On the other hand, certain institutional shareholders such as

and UTI were heavily subjected to governmental and bureaucratic

A related category of institutional shareholders is foreign

Another category of foreign investors subscribes to depository

the wishes of management, or the DRs have been effectively

Shareholder passivity, both among retail and institutional

IV. Regulatory Reforms Towards Greater Shareholder

Over the last decade, regulatory efforts in India have focused

In 2001, the facility of voting by postal ballot was introduced.30

While the postal ballot facility represented a sea change in

Given the inadequate functioning of the postal ballot system,

2012, SEBI amended the listing agreement requiring large companies

In order to enable the shareholders to exercise their corporate

Shareholding in a company is considered to be a bundle of

Although shareholders cannot be compelled to exercise their

By imposing mandatory disclosure obligations and thereby

While SEBI’s circular technically applies only to mutual funds,

D. Assessing the Reforms

The regulatory reforms discussed in this section have been

At the same time, it would be imprudent to assume that such

Despite these regulatory reforms, one significant area of

V. Corporate Governance Intermediaries

Globally, governance intermediaries such as proxy advisors

A. Proxy Advisors in India: Their Influence

Since 2010, the proxy advisory industry has blossomed in India

major corporate transactions such as mergers and takeovers. 55 Where

No longer can managements and controlling shareholders

Proxy advisory firms also benefit institutional investors in